3 Entities in a Supply Chain
The existence of a supply chain pivots upon three core entities. These entities, integral to the supply chain processes, may represent departments, functional areas, or even individuals within a broader organizational context. They feature prominently in both internal and external supply chains, showcasing the universal applicability of supply chain principles. The three essential entities are Supplier, Producer, and Customer. A comprehensive understanding of these roles is integral to our supply chain management course, diploma of supply chain management, and a distance-learning MBA in supply chain management.
A supplier, in the realm of supply chain management, is not just a provider or seller; they represent a strategic partnership that contributes to the overall functioning and success of a business. This entity supplies a myriad of resources, from goods and services to energy and components, all critical in the production process of a product or service. Suppliers’ offerings are as diverse as the businesses they cater to – from farm-fresh sugar cane and fruits, and industrial-grade metals, to specialized items like roofing nails or electric wiring.
- They also supply technologically advanced components, such as computer chips and aircraft turbines.
- In addition, suppliers also render services such as natural gas provision, electrical power, and transportation.
Unlike vendors, who are generically classified as sellers in the market, suppliers are entities with whom businesses maintain a dedicated relationship, aligning their goals with the buyer’s objectives to achieve mutual success.
The producer plays a vital role in transforming inputs (from Entity-1) such as services, materials, supplies, energy, and components into high-quality finished products. These products can range from dress shirts and packaged dinners to airplanes, electric power, legal counsel, or guided tours. It is important to note that supply chain management for services may have a more conceptual nature, compared to manufacturing.
As an indispensable part of the SCM system, the customer represents the final destination in the product’s journey. After traversing through the stages of production, the finished goods reach the consumers. These consumers might adorn themselves with the crafted shirts, savor the pre-packaged meals, embark on journeys aboard the aircraft, or illuminate spaces using the supplied electricity. The customer’s role is not merely passive – their preferences, needs, and feedback can greatly shape the dynamics of the whole SC, rendering them a crucial cog in the SCM machinery.
5 Phases of Supply Chain Management:
The process of Supply Chain Management (SCM) can be divided into five distinct phases, which together allow businesses to move from raw materials to finished products optimally.
The first phase involves strategic planning of the supply chain. Businesses determine the best way to meet customer demand while minimizing costs and anticipating potential problems. For instance, a clothing manufacturer might analyze market trends to anticipate future demand and schedule production accordingly.
The second phase involves sourcing the raw materials or components needed for production. Companies need to find reliable suppliers who can deliver high-quality materials on time and at a reasonable cost. For example, a car manufacturer might source steel from a particular supplier because of their track record for quality and punctuality.
The third phase of SCM involves the production or manufacturing process. This is where the raw materials or components sourced are transformed into the final product. For example, a bakery will take raw ingredients like flour, sugar, and eggs and turn them into baked goods.
This fourth phase, also known as logistics, involves the storage and delivery of products to retailers or customers. For example, a book publisher might store books in a warehouse before distributing them to bookstores and libraries.
The final phase involves managing product returns due to defects, damages, or customer dissatisfaction. Businesses must have processes in place to handle returns efficiently to maintain customer satisfaction. For instance, an e-commerce company might have a streamlined return process that includes pre-printed return labels and quick refunds or exchanges.
5 Key Objectives of Supply Chain Management
The primary objectives of SCM are to improve efficiency, enhance customer satisfaction, and increase profitability.
1. Improve Efficiency
SCM seeks to streamline operations and eliminate waste. This objective involves optimizing inventory levels, reducing lead times, and increasing process speeds. For example, a clothing retailer might utilize SCM software to accurately forecast demand, thereby reducing excess inventory and associated holding costs.
2. Enhance Customer Satisfaction
SCM aims to ensure that the right products are delivered to the right place at the right time. This objective, when achieved, results in high customer satisfaction. A practical instance might involve an e-commerce company that utilizes advanced tracking and logistics coordination to provide customers with real-time updates on their product delivery, ensuring timely and accurate delivery.
3. Increase Profitability
By improving efficiency and customer satisfaction, SC ultimately aims to boost the company’s bottom line. This objective might manifest in a manufacturing firm adopting lean principles in its supply chain processes, thereby reducing waste and operational costs, improving product quality, and enhancing customer satisfaction, all of which contribute to increased profitability.
4. Risk Management
An essential objective of SCM is to identify potential risks and implement strategies to mitigate them. Managing supply chain risks involves monitoring supplier performance, maintaining quality control checks, and creating contingency plans for unforeseen disruptions. For instance, a food production company might establish stringent supplier selection criteria and conduct regular quality inspections to prevent any compromise in the quality of raw materials, thus ensuring the consistent quality of the final product.
5. Sustainability and Social Responsibility
In today’s increasingly eco-conscious business environment, SC also focuses on implementing environmentally friendly practices and promoting social responsibility. This objective could involve sourcing materials from certified sustainable suppliers, minimizing waste and energy consumption, and ensuring fair labor practices throughout the supply chain. An example might be a coffee retailer sourcing beans from fair-trade suppliers, demonstrating a commitment to ethical sourcing and supporting sustainable agricultural practices.
What Are the 10 Main Supply Chain Models?
There are 10 widely recognized supply chain models. Each has its strengths and weaknesses and is best suited to particular types of businesses and market environments.
1. Push and Pull Model
This model is split into two parts. The ‘push’ part involves the production and storage of goods based on demand forecasts, while the ‘pull’ part involves the production of goods in response to actual demand. For instance, a car manufacturer might use a push model to stockpile a certain number of vehicles based on anticipated demand and then switch to a pull model to manufacture additional cars once customer orders start coming in.
2. Agile Supply Chain Model
The agile supply chain model prioritizes flexibility, enabling companies to respond quickly to changes in demand or supply conditions. It is particularly useful for businesses that operate in volatile markets where customer preferences can shift rapidly. An example of this could be a tech company that maintains a flexible supply chain to swiftly bring a new smartphone to market following the release of an unexpected competitor product.
3. Lean Supply Chain Model
This model focuses on efficiency and cost reduction by minimizing waste in the supply chain. The lean supply chain model suits businesses with a stable, predictable demand. An example might be a fast-food restaurant using a lean supply chain model to ensure it has the right amount of ingredients delivered just in time to meet its daily demand, thereby minimizing food waste and storage costs.
4. Supply Chain Network Design Model
The supply chain network design model involves strategic decisions about the configuration of the supply chain, including the number, location, and size of warehouses and distribution centers. For instance, a nationwide retailer might use this model to determine the optimal locations for its distribution centers to minimize transportation costs and ensure rapid delivery to its stores.
5. Sustainable Supply Chain Model
This model incorporates environmental and social responsibility considerations into supply chain decisions. For example, a clothing retailer might use a sustainable supply chain model to source its materials from suppliers that use organic farming practices and provide fair wages to their workers.
6. Continuous Flow Model
This model emphasizes the smooth, uninterrupted flow of materials through the supply chain. The goal is to eliminate bottlenecks and breakdowns, thereby reducing lead times and increasing overall efficiency. A car manufacturing plant utilizing assembly line techniques exemplifies this model, where each stage of production is finely tuned to seamlessly connect with the next.
7. Fast Supply Chain Model
This model prioritizes speed and responsiveness. It thrives in industries where the pace of change is rapid and the lifespan of products short. For instance, a fashion retailer operating in the fast-fashion segment would use this model, constantly updating their collections to keep up with changing trends and consumer demands.
8. Flexible Supply Chain Model
In this model, adaptability is key. It is designed to respond quickly to sudden changes in demand or supply. This could be exemplified by an IT company that maintains a flexible SC to swiftly adapt to new technologies or unexpected shifts in market conditions.
9. Efficient Supply Chain Model
The efficient model focuses on minimizing costs throughout the supply chain. This model suits industries where margins are thin and cost efficiency is paramount. A supermarket chain, for example, might use this model, striking a balance between maintaining lower inventory levels and meeting customer demand.
10. Customer Driven Supply Chain Model
This model places the customer at the center of all supply chain decisions. It aims to enhance customer satisfaction and loyalty by aligning supply chain operations with customer needs and preferences. An online retailer that leverages data analytics to predict customer purchasing behavior and personalizes its offerings accordingly falls under this model.
Supply Chain Management Examples
Let’s delve into three examples of supply chain management (SCM) across diverse industries.
1. Supply Chain in the Automotive Industry
Renowned for its lean supply chain management, Toyota utilizes the ‘Just-In-Time’ (JIT) approach. This means materials for manufacturing arrive precisely when needed, minimizing inventory costs and waste. Toyota’s SC is a testament to the company’s commitment to continuous improvement and efficiency.
2. Supply Chain in the Technology Industry
Apple’s SCM is a model of excellence, primarily due to its ability to coordinate with suppliers and manufacturers across the globe. Apple maintains high-quality standards at every stage of the SC, ensuring the production of innovative and reliable products that resonate with its customer base.
3. Supply Chain in the Retail Industry
Amazon epitomizes effective SCM in the retail industry. Leveraging technology, the company has streamlined processes from warehousing to delivery, providing a seamless and efficient shopping experience for its customers. Amazon’s SCM has been pivotal in its ability to offer vast product selections and speedy delivery times.
In each of these examples, SCM plays a significant role in the company’s success, underlying the importance of a well-coordinated SC. The principles and practices adopted by these companies offer valuable insights for entities looking to enhance their own SCM strategies.
Supply Chain Structure & Management
1. Supply Chain Management Strategies
There are three main types of supply chain management strategies: Stable, Reactive, and Efficient Reactive:
- Stable: With a significant history of stability between demand and supply.
- Reactive: These are focused on execution, efficiencies, and cost performance.
- Efficient Reactive: This uses simple connectivity technologies and has little need for real-time information.
2. Complexities in Simplest Supply Chains
Supply chain management is a complex, multi-faceted discipline, requiring strategic planning, coordination, and execution across several stages and geographies. Despite these challenges, effective SCM can lead to improved operational efficiency, cost savings, and competitive advantage.
A. DEMAND FORECASTING
One of the first complexities that arise in SCM is predicting demand accurately. For example, a sudden rise in demand for at-home workout equipment during the COVID-19 pandemic caught many suppliers off guard, resulting in stock-outs and delayed deliveries.
B. SUPPLIER RELIABILITY
Next, supplier reliability is an inherent challenge in SCM. Companies depend on their suppliers to deliver quality materials on time, but any lapse can disrupt the entire SC. For instance, the infamous 2010 Toyota recall was due to defective accelerator pedals from a single supplier, demonstrating how supplier issues can escalate.
C. LOGISTICS AND TRANSPORTATION
Additionally, planning and managing the logistics and transportation of goods is another complicated aspect. As an example, consider how weather conditions can delay shipments, causing a ripple effect all through the supply chain.
D. INVENTORY MANAGEMENT
Ensuring optimal inventory levels is a delicate balancing act in SCM. For example, Apple’s SC is renowned for its lean inventory management, but the global chip shortage exposed the risks of this approach.
E. REGULATORY COMPLIANCE
Lastly, complying with different laws and regulations across various countries can be daunting. A case in point is how multinational firms must navigate complex import-export regulations, tariff systems, and customs requirements in their global supply chains.
3. Supply Chain Management Costs
Supply chain management costs encapsulate the monetary expenses linked with the production and delivery of goods or services. In certain industries, the costs incurred in managing the supply chain can account for up to half of a company’s total revenue. Research conducted by internationally recognized consulting firm A.T. Kearney suggests that inefficiencies within the supply chain could contribute to a quarter of a firm’s operating expenses. In scenarios where profit margins are razor-thin, hovering around 3% to 4%, even minor enhancements in efficiency could potentially double a company’s profitability.
The supply chain management costs can be broadly categorized into two types: Direct and Indirect costs.
A. DIRECT COSTS
Direct costs, commonly known as Cost of Goods Sold (COGS), include raw materials, labor, and expenses related to the manufacturing process. For example, a company crafting furniture might have direct costs including timber ($500), labor ($300), and factory overheads ($200), leading to a total COGS of $1,000.
B. INDIRECT COSTS
Indirect costs, on the other hand, consist of expenditures such as warehouse storage, transportation, and administrative overheads. Continuing with the furniture company example, they might incur $150 for warehouse storage, $200 for transportation, and $50 for administrative tasks. This adds up to a total indirect cost of $400.
C. TOTAL SUPPLY CHAIN MANAGEMENT COST
Hence, the total supply chain management cost for this company would be the sum of direct and indirect costs. In our example, it is $1,000 (COGS) + $400 (indirect costs) = $1,400. Managing these costs effectively and efficiently is a fundamental aspect of supply chain management, underpinning the financial health and sustainability of a business.
4. Future of Supply Chains
As we forge ahead into the future, supply chains are expected to evolve significantly, spurred by technological advancements and changing market dynamics. Here are some key trends that will shape the future of SCs:
A. ARTIFICIAL INTELLIGENCE (AI) AND MACHINE LEARNING (ML)
AI and ML are set to revolutionize SCM by streamlining operations and enhancing decision-making. For example, AI can be used to predict consumer demand with high accuracy, allowing companies to optimize their inventory levels and reduce costs. Global retailer Walmart, has been leveraging ML to improve its demand forecasting and inventory management.
B. BLOCKCHAIN TECHNOLOGY
Blockchain has the potential to improve transparency and traceability in supply chains. This technology can be used to create a secure, immutable record of all transactions, making it easier to track products from the manufacturer to the consumer. De Beers, the diamond company, has implemented a blockchain solution to trace the journey of diamonds from the mine to the consumer, reducing the risk of conflict diamonds entering their SC.
C. INTERNET OF THINGS (IoT)
IoT devices can provide real-time tracking and monitoring of goods in the SC, improving efficiency and reducing risk. For example, DHL uses IoT technology to monitor the temperature of sensitive goods, such as pharmaceuticals, throughout their journey.
As awareness of environmental issues increases, companies are under pressure to make their supply chains more sustainable. This could involve using renewable energy sources in manufacturing processes, choosing suppliers who follow sustainable practices, and reducing waste. For instance, Nike has been investing in sustainable materials and manufacturing processes to reduce its environmental impact.
E. ROBOTICS AND AUTOMATION
Automation can increase efficiency and reduce costs in the SC. Robots can be used for tasks such as picking and packing in warehouses. Amazon, a pioneer in this area, uses robots extensively in its warehouses to improve efficiency and speed up order fulfillment. The future of SCM promises to be exciting and transformative, abounding with innovative technologies and practices that will reshape the landscape of the industry.
F. INTERCONNECTED WORLD
In today’s interconnected world, the scope of SCM extends beyond national boundaries. A global supply chain intricate web facilitates the efficient movement of goods, services, and information from origin to destination, ensuring timely delivery and satisfaction of market demand. Notably, a research-based online PhD in supply chain management can offer invaluable insights into optimizing these global supply chains, contributing to enhanced operational efficiency, risk mitigation, and competitive advantage.
Types of Supply Chain Management
1. SCM in Manufacturing
SCM for manufacturing primarily revolves around the efficient management of tangible inputs such as raw materials, machinery, and labor. The ultimate goal is to produce physical goods that can be stored, transported, and sold to consumers. The manufacturing supply chain is often linear, with raw materials going through several stages of transformation before emerging as finished products. The focus is on maintaining a smooth flow of materials, minimizing waste, reducing lead times, and optimizing inventory levels.
Example of Food Vendor: When considering the context of a street food vendor, services such as utilities, transportation, warehousing, carpentry, and cleanup emerge as critical aspects of the operation.
2. SCM in Services
SCM for services deals with the orchestration of intangible assets such as knowledge, skills, and information. The services supply chain is more interactive and dynamic, often requiring real-time responsiveness to customer demands. Here, the emphasis is less on physical goods and more on creating unforgettable experiences and offering solutions to customer problems. This type of supply chain management aims at enhancing service quality, improving customer satisfaction, and building long-term customer relationships.
Example of Electricity Supplier: In an electric utility’s SC, products, services, and supplies are actively acquired and then distributed into three distinct channels: residential customers, commercial clients, and other utilities.
SCM processes, partners, models, and demand management exhibit a wide spectrum of variations. As we progress and delve into more intricate facets of this conversation, bear in mind these fundamental considerations:
- The structure of SCM actively shifts and adapts based on the historical patterns of demand, the overarching focus of the business, and the specific requirements for connectivity, technology, and equipment.
- We can actively view supply chains through the lens of various processes. These include gathering and processing marketing data, distributing and paying invoices, processing and shipping materials, scheduling, and fulfilling orders, among others. These functions intersect and weave through multiple entities.
- Supply chains actively encompass a multitude of entities and flows. Suppliers direct the flow of materials and services to customers, while customers reciprocate with a flow of payments towards suppliers. Information is a crucial element that circulates reciprocally. Additionally, SCs can operate in a reversed manner. A customer initiates this reverse chain by returning items such as components in need of repair or replacement, goods for re-manufacture, and outdated goods for recycling or disposal. This backward chain actively incorporates information flows along with the movement of cash or credits, mirroring the complexity of the forward chain.
- Supply chain management, by definition, is the strategic coordination and execution of a complex network of entities, activities, and processes aiming to create and distribute final products or services. It transcends the simplistic supply chain meaning of sourcing raw materials and producing finished goods. Instead, it encompasses a wide array of functions, from supply chain planning, managing inventory levels following customer demand, and enhancing customer experience, to reducing costs and increasing efficiency. The importance of supply chain management is underscored in times of global disruptions, such as the COVID-19 pandemic, where the volatility of supply and demand has necessitated judicious and strategic management of resources. Ultimately, the goal of effective supply chain management is to ensure customer satisfaction by delivering the final product seamlessly and efficiently.